5 Worst Stock Market Crashes
Introduction
Picture this: A sudden stock market event wipes out billions of INR, leaving investors in panic. This scenario is not as rare as you might have thought. While investing in the stock market can yield significant returns, investors should carefully manage risk during such crashes.
Did you know that COVID-19 had the most significant impact on the stock market, wiping out a whopping INR 12 lakh crore of market value in just one week1?
This blog will take a trip down India's less-than-memorable financial history and delve into five of its worst stock market crashes. We will also understand the reason behind these crashes and how investors should protect their capital during such events.
5 Worst Stock Market Crashes
1. COVID-19 Pandemic (2020)
The COVID-19 pandemic had a catastrophic effect on the global stock market, and India was no exception. The Sensex plummeted by 13,985 points in a single week.
On March 23, 2020, the Sensex and Nifty experienced one of their most significant falls, dropping by over 13% and wiping out INR 13.95 lakh crore from investors' pockets. The fallout was so severe that during the early trades itself, the trading halted 45 minutes after the Sensex hit the 10% lower circuit. This happened twice in ten days.
This crash coincided with the slump in Indian banking shares following the Yes bank crisis because of the deteriorating financial position.,. Fear, uncertainty, and panic selling became rampant as the uncertainty surrounding the pandemic compounded the situation.
2. Demonetisation (2016)
The period between 2015 and 2016 was challenging for the Indian stock market. By February 2016, the Sensex had dropped by 26% compared to the previous eleven months, mainly due to increasing non-performing assets (NPAs) and global economic weakness.
Later in the year, demonetisation, announced on November 8, 2016, led to widespread concern about a cash crunch, resulting in frantic selling of stocks. The next day, the market hit significantly, with the Sensex and Nifty 50 plunging by over 6% in four days. Only those with long-term strategies were better equipped to weather the storm.
3. Yuan Devaluation And Brexit (2015)
On August 24, 2015, the Sensex crashed by ~6%, wiping out INR 7 lakh crore in market capitalisation. Two significant factors contributed to this crash: the devaluation of China's currency, the Yuan, to boost exports and the UK's decision to leave the European Union (Brexit).
These factors, coupled with falling oil prices and Greece's default on a debt of €1.6 billion to the International Monetary Fund, led to a significant drop in the Sensex and affected investors with global investments. This crash underscored the importance of monitoring global markets and diversifying across asset classes and geographies.
4. US Financial Crisis (2008)
The 2008 US financial crisis, triggered by the subprime mortgage crisis, had a ripple effect on the global stock market, including India.
On January 21, 2008, also known as "Black Monday," the Sensex plummeted by 1,408 points due to the fallout from the housing bubble in the US. This crisis led to an increase in US interest rates, sparking fears of a recession.
The crisis affected many investors with stakes in foreign mutual funds even more severely. By the end of 2008, the Sensex dropped from its peak of 20,645 to 9,716, a staggering 50% fall in just 12 months.
5. Harshad Mehta Scam (1992)
On April 23, 1992, Sucheta Dalal, a business journalist, exposed India's most significant financial scam, leading to the Sensex plunging by 570 points on that day, a sharp fall of ~13%. The expose wiped out almost INR 4,000 crore from investors, a considerable sum in 1992.
In the backdrop, Harshad Mehta, dubbed the "Big Bull of Dalal Street," was charged with orchestrating a series of scams exploiting loopholes in banks. For instance, Mehta pumped up the stock prices of ABC Ltd. from INR 200 to INR 9,000 (a 4400% rise) in just 2-3 months, syphoning INR 1,700 crore from banks to fund his frauds.
However, the scam was soon uncovered, leading to a massive drop in the Sensex by over 50% over one year. This scam highlighted the need for better due diligence and regulations in the financial sector.
Why Do Stock Markets Crash?
Stock market crashes can occur due to various reasons:
- Geopolitical Events: Political instability, wars, and tensions over the borders can negatively impact international markets, causing a domino effect.
- Speculative Bubbles: Irrational optimism and herd mentality can lead to the overvaluation of stocks, creating a speculative bubble that eventually bursts, triggering a market correction.
- Black Swan Events: Unpredictable events like pandemics or natural disasters can disrupt markets.
- Corporate Failures: Fraudulent practices or bankruptcies of major companies can erode investor confidence, leading to industry-wide market downturns.
How Can Investors Safeguard Their Portfolios During A Stock Market Crash?
Here are some tips for investors to avoid significant losses during a stock market crash:
- Diversification: Spread investments across different sectors, asset classes, and regions to mitigate losses arising due to one class by offsetting with the profits from other classes.
- Explore Non-Market Linked Investment Options: Allocate some of your funds to non-market linked investment options like corporate bonds, securitised debt instruments (SDIs), and fractional commercial real estate (CRE) that offer fixed, predictable returns irrespective of the market volatility.
- Regular Monitoring And Rebalancing: Keep an eye on your portfolio and adjust it according to changing market conditions.
- Take Advantage Of Cost Averaging: Invest a fixed amount periodically to average out prices and reduce the impact of market volatility. A typical example of this is SIPs.
Conclusion
Understanding stock market crashes is crucial for investors. While market crashes can be overwhelming, it is essential not to let fear dictate investment decisions. Diversification and prudent asset allocation, including non-market-linked investment options, can help investors navigate turbulent market conditions and achieve their financial goals.
At Grip Invest, you can explore fixed, high-yielding, non-market-linked investments to protect you from market volatility.
Frequently Asked Questions On Biggest Stock Market Crash
1. Where is your money safe if the stock market crashes?
Debt investments like fixed deposits, corporate bonds, LeaseX, LoanX, BondX, InvoiceX, etc., are safer alternatives during stock market crashes due to their non-market-linked nature. They are regulated and rated, offering high yields with fixed monthly/ quarterly returns.
2. How does cost averaging work?
This strategy allows investors to buy more shares when prices are low and fewer when prices are high. Over time, this can reduce the impact of market volatility and potentially generate favourable long-term returns.
References:
- The Economic Times <https://bit.ly/3Me9ZiN>
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